The Tax and GST Consequence of Airbnb
As Airbnb (or other private property rental sites like bookabach*) are becoming more popular the tax consequence of running one needs to be carefully considered.
There are different rules for both Tax and GST and also if it is a separate Holiday home/bach or your permanent residence, and a few other aspects in the mix.
It’s a little confusing so we’ll try and explain…
*For the ease of reading, we’ll refer to this as Airbnb income for the rest of this article
All income derived from Airbnb is taxable and should be declared as income on tax returns.
Allowable expenses can be split between Direct Costs due to the income (which are fully deductible); and Mixed Use Expenses where it relates to both private use and Airbnb use (an allowable apportionment of these expenses needs to be calculated).
The apportionment method used depends on whether the income relates to a separate property or your personal home.
If a separate property (ie: Bach) and there is a period of non-use that is 62 days or more then the following Mixed Use Assets (MUA) rules apply to calculate the percentage of expenses that are deductible:
The Formula for this is:
Expenditure x Income Earning days (ie: days used by Airbnb customers)
Total Use days (ie: days used both personally and for Airbnb)
If the property is also used by friends and family – who pay less than 80% of the Market Value for stays – then you do not need to include this ‘friends and family’ income as the days they stayed would be considered personal use.
What can you claim if the MUA rules above don’t apply?
This would be the case if the Airbnb income was derived from your personal residence as the property would be in use all year round (ie: the non-use for at least 62 days in the method above would not be applicable).
A fair and reasonable approach needs to be used. The courts have accepted a Floor Area apportionment as being reasonable (similar to Use of Home Office claims) with also an actual occupancy use. These would need to be looked at and calculated on a case by case basis.
Airbnb’s, in the majority of cases, will fall under the rules for Commercial Dwellings for GST – similar to a Bed & Breakfast.
This means that if taxable income exceeds $60k you will need to be registered for GST. You need to be aware that:
- If family and friends stay for a reduced amount (or for free) this still needs to be considered as income for GST registration purposes but not for income tax. How would this work practically? If you’re close to the GST threshhold of $60,000 and your family and friends stay there for free or at a discounted price, you could be tipped into registration without meaning to be!
- If you are already GST registered due to sole trader activities or if property owned via a Trust etc, then this Airbnb income can come under your taxable activities for GST.
The GST claimable on expenses will be 100% if a direct cost due to the Airbnb income, or if a mixed cost the amount to be included as an expense for GST will be based on the % allowed as detailed above.
The main issue with GST is on the Capital Asset (the property) – as this will now also become part of the GST regime. You will need to identify the Private and Income Use % and apply the Mixed Use Rules for GST each year (note: there is no limit to the number of adjustment periods for Mixed Use Assets in the GST regime for properties).
This calculation is quite complex and would need to be done as part of the Annual Accounts each year.
Additional GST would also be payable on the sale of the property – depending on what has already been claimed.
What’s the downside of being registered for GST? It can be unexpectedly very expensive! If you have to become registered for GST or you fall over the threshhold without planning to by having family and friends to stay, then you have to pay GST on either the sale of your property, or even if you decide to stop using it for Air BnB, you have to pay GST back.
Here’s an example:
A private bach valued at $450,000 is used for Air BnB and generates $40,000 in a year of income. You usually let it out at $500 per night. Your family and friends stay there for 41 days in one year for free.
Rental Income = $40,000
Deemed Rental Income = $20,500
You decide to stop renting it out because it wasn’t worth the hassle and the IRD decide you should have been GST registered and now want the GST back on the ‘change of use’ from commercial to private – they will want GST of $58,695 back.
What about if the property was owned in a Partnership or Trust (by partnership we mean a registered partnership with the IRD not joint ownership)? How would this impact for Income Tax and GST.
Income Tax would stay the same but for GST purposes all stays by partners or associates of the Trust would be deemed to have taken place at Market Value – this could easily take you above the GST threshold without you actually having received much Airbnb income.
By using your property to derive income there can be other issues that need to be considered:
- Rates/Consents – Local Councils may impose additional requirements for visitor accommodation
- Insurance – Standard house and/or contents insurance does not cover Airbnb type rentals
- Lending – Running Airbnb rentals may impact on bank lending and this would need to be discussed with your bank.
Phew. As we mentioned – it’s pretty complex, and incredibly important to get your head around before you list your property on a website! Our advice, as always, is to speak to Beany and get some direct information that is pertinent to your situation before you load up your property for short stay rental!